ECB set to begin tiering on 30 October. This will mean that some cash will end up earning 0% (the exempt tier). And the rest -0.50%. The “non-exempt tier of excess liquidity holdings will continue to be remunerated at zero percent or the deposit facility rate, whichever is lower”, at the moment this is -0.50%.
There has been some discussion about how money rates might change after tiering. Could they drift higher to be closer to the 0% exempt rate, perhaps? After all most money rates are clustering around the deposit facility -0.5% at present. Looking at the forward eonia (or €str) rate to just beyond the start of tiering, we find that they are around 1bp higher than where they sit today. So the market is not expecting much upward drift at all.
Where do other rates sit:
Refi = 0.00%
Exempt tier = 0.00%
Deposit = -0.50%
ECB Marg Lending = +0.25%
eonia = -0.466%
eonia on 18 Nov = -0.455% (before any ECB meeting and 1m from today)
€str = -0.551%
overnight GC = -0.505% (eur repo index EUR)
Tiering system mostly helps Italian banks that see a substantial amount of unused exempt allowances. However, there is no significant evidence that such banks are building up their cash buffers so that they can use up this allowance, at least not yet because Euribor is not showing significant upward pressure (see chart below of Libor-OIS).
3m Libor-OIS spreads sees EUR narrow
According to Danske Bank’s report, history suggests that the Eonia would start to drift higher only when excess liquidity reaches levels of around €200-300bn, with the current at more than €1800bn, ECB could safely exempt more than 1000bn of reserves without material moves to overnight rates. History may not be a perfect guide to the future, as the relationship between Eonia and excess liquidity depends on how fragmented the banking system is. Still, it should be safe to say that excess liquidity would need to fall considerably before short money market rates were affected. In addition, if money market rose mainly in non-core countries, most of these transactions would be excluded from the final calculations (25% biggest and 25% smallest transaction rates are excluded), having no impact on the €STR.